In this piece, we will take a look at the ten best international index funds to buy. For more index funds, head on over to 5 Best International Index Funds To Buy.

America has the biggest stock exchanges in the world. The two largest exchanges, namely the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations Stock Market (NASDAQ), are both in America. Their combined market capitalization of approximately $40 trillion is greater than the market capitalization of the next six biggest exchanges, indicating the strength of the American financial system. At the same time, some of the largest companies in the world in terms of market cap, such as Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT), are both in America, and their market capitalization is greater than several small national exchanges of other countries such as the Tehran Stock Exchange and the Taiwan Stock Exchange Corporation (TWSE).

However, the growth in globalization and technology coupled with the inter linkage of firms with each other across continents has changed the business environment and meant that not all of the world’s most important companies are in America. The best example of this phenomenon is the semiconductor industry. While firms such as Synopsys, Inc. (NASDAQ:SNPS) and Teradyne, Inc. (NASDAQ:TER) – which make and sell equipment to design chips – and the designers themselves such as NVIDIA Corporation (NASDAQ:NVDA) and Advanced Micro Devices, Inc. (NASDAQ:AMD) – which design and sell the chips – are all in the U.S., several of the world’s most consequential companies such as ASML Holding N.V. (NASDAQ:ASML) and the Taiwan Semiconductor Manufacturing Company (NYSE:TSM) are not. In fact, ASML is the only company in the world that can make and sell advanced machines for semiconductor fabrication.

While shares of the duo are traded on American exchanges, a variety of other important firms, particularly those in the world’s second largest economy China, are not. This makes for an important argument for investing in foreign markets, supplemented by the fact that economic downturns in America might not be replicated in other countries – and investing in foreign stocks could prove to be an effective way to protect one’s portfolio (or even grow it) during an economic downturn.

The latter reason to invest foreign becomes even more important when we take a look at the current financial debate in America. The Russian invasion of Ukraine that kicked off in February 2022 provided a big boost to inflationary pressures in the U.S. and forced the Federal Reserve to finally kick into action and rapidly raise interest rates. The objective of this is to encourage people to save more and make consumption harder by increasing the costs of borrowing. This in turn should reduce the demand for goods and products and in turn drive down the costs of production and reduce prices. However, another side effect of the rapid interest rate hikes is a recession – generally defined as a consecutive quarterly slowdown in economic growth. Most experts believe that a recession is unavoidable later this year, including officials at the Federal Reserve. The meeting minutes of the Fed’s latest gathering confirmed this much as they shared:

For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market. Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years. Real GDP growth in 2024 was projected to remain below the staff’s estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential. Resource utilization in both product and labor markets was forecast to be much less tight than in the January projection. The level of real output was projected to move below the staff’s estimate of potential output in early 2024, more than a year sooner than in the previous projection. Likewise, the unemployment rate was projected to rise above the staff’s estimate of its natural rate early next year.

So, if there’s a recession in the U.S., where the rates have been raised higher than in other regions, then foreign investing makes more sense. At the same time, another key reason many institutional investors invest abroad is that emerging markets often give higher returns than developed markets. Of course, most of these investments are in bonds with fixed interest rates, but the business potential in emerging markets can contribute to firms operating in those areas seeing big gains in their share price.

However, the Fed’s interest rate decisions should not be the only factor influencing your investment decisions, believes the billionaire Ken Fisher of Fisher Investments, who said the following in a recent video:

Simply central banks hiking rates, short term rates, or lowering them does not in itself tighten or loosen money. It just changes the price of it. It doesn’t have anything to do with tightening or loosening which is abut the availability and the presence and the creation of money. They’re separate things. You see that last year from the Fed doing what it’s done, which you know, I’m not gonna go back in detail over that because you do know that, you were there. And the fact that lending started the year with, in America, four percent growth rate. And ended the year with over all the year over year for the year 12% growth rate. Boomed as they raised rates! You can’t do that if they’re really tightening money. You follow that logic? Banks can’t keep lending at such robust levels, if in fact, they’re tightening, central bank’s tightening, if it’s really tight, if they’re really trading tight money. Just high priced, loose money. So, then again, here’s the data

. . . The Fed wasn’t really going, in May I point that Jerome Powell said . . we aren’t even considering 75 basis point hikes. Then in June they rose rates, overnight lending rates, by 75 basis points, the next meeting 75 basis points, the next meeting 75 basis points, the next meeting 75 basis points. He said that in May. Market fell to October. They’re still raising rates. Where are we now in the market? Where we were in May! You follow that. . . .If don’t fight the Fed worked, you should have gotten out of the market then, and not got back in. In fact, it worked from May to June, to July, to August, to September, four months. May to June, July, August, September. Didn’t work October, November, January, February. Four months! There you go! Back to 50/50!

With these insights in mind, let’s take a look at some well performing international index funds, out of which the top picks are WisdomTree Japan Hedged SmallCap Equity Fund (NASDAQ:DXJS), Invesco International Dividend Achievers ETF (NASDAQ:PID), and Vanguard European Stock Index Fund (NASDAQ:VEUSX).

Our Methodology

To compile our list of the best international index funds, we first made a list of exchange traded funds ranked two stars or higher by Morningstar which invests in foreign companies. Then, their five year average daily total returns were analyzed and the funds were ranked according to this. Finally, the top ten funds out of these with the lowest expense ratios were used for our list of the best international index funds.

Best International Index Funds To Buy

10. Global X MSCI SuperDividend EAFE ETF (NASDAQ:EFAS)

5-Year Daily Total Return: 0.82%

Global X MSCI SuperDividend EAFE ETF (NASDAQ:EFAS) invests in large foreign firms. The largest portion of its holdings is in financial firms, with the next two dominant categories being consumer cyclical and communications services firms.

9. First Trust Developed International Equity Select ETF (NASDAQ:RNDM)

5-Year Daily Total Return: 1.71%

First Trust Developed International Equity Select ETF (NASDAQ:RNDM) is part of the First Fund family. It has $13.6 million in total assets, with 11.08% in year to date return. It heavily invests in financial firms and industrial companies.

8. First Trust International Equity Opportunities ETF (NASDAQ:FPXI)

5-Year Daily Total Return: 2.64%

First Trust International Equity Opportunities ETF (NASDAQ:FPXI) is another fund that is  part of the First Fund family. It invests in large foreign firms but those that are growth entities. The fund has $247 million in net assets and 3.75% in year to date returns. More than 90% of First Trust International Equity Opportunities ETF (NASDAQ:FPXI)’s holdings are in stocks, with consumer cyclical and healthcare being the dominant categories.

7. Vanguard Developed Markets Index Fund (NASDAQ:VTMGX)

5-Year Daily Total Return: 3.42%

Vanguard Developed Markets Index Fund (NASDAQ:VTMGX) is part of the Vanguard Fund family. It has $160.8 billion in net assets, and 10.24% in year to date return.

6. Schwab International Index Fund (NASDAQ:SWISX)

5-Year Daily Total Return: 3.60%

Schwab International Index Fund (NASDAQ:SWISX) invests in a blend of growth and value foreign firms. It is a part of the Schwab fund family and has 11.25% in year to date returns.

WisdomTree Japan Hedged SmallCap Equity Fund (NASDAQ:DXJS), Schwab International Index Fund (NASDAQ:SWISX), Invesco International Dividend Achievers ETF (NASDAQ:PID), and Vanguard European Stock Index Fund (NASDAQ:VEUSX) are some top international index funds.

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Disclosure: None. 10 Best International Index Funds To Buy is originally published on Insider Monkey.